IDEAS home Printed from https://ideas.repec.org/a/oup/ajagec/v100y2018i1p264-285..html
   My bibliography  Save this article

Commodity Price Comovement and Financial Speculation: The Case of Cotton

Author

Listed:
  • Joseph P Janzen
  • Aaron Smith
  • Colin A Carter

Abstract

Recent booms and busts in commodity prices have generated concerns that financial speculation causes excessive commodity-price comovement, driving prices away from levels implied by supply and demand under rational expectations. We develop a structural vector autoregression model of a commodity futures market and use it to explain two recent spikes in cotton prices. In doing so, we make two contributions to the literature on commodity price dynamics. First, we estimate the extent to which cotton price booms and busts can be attributed to comovement with other commodities. Finding such comovement would be necessary but would not be sufficient evidence to establish that broad-based financial speculation drives commodity prices. Second, after controlling for aggregate demand and comovement, we develop a new method to point identify shocks to precautionary demand for cotton separately from shocks to current supply and demand. To do so, we use differences in volatility across time implied by the rational expectations competitive storage model. We find limited evidence that financial speculation caused cotton prices to spike in 2008 or 2011. We conclude that the 2008 price spike was driven mostly by precautionary demand for cotton, and the 2011 spike was caused by a net supply shortfall.

Suggested Citation

  • Joseph P Janzen & Aaron Smith & Colin A Carter, 2018. "Commodity Price Comovement and Financial Speculation: The Case of Cotton," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(1), pages 264-285.
    • Handle: RePEc:oup:ajagec:v:100:y:2018:i:1:p:264-285.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/ajae/aax052
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dejan Živkov & Boris Kuzman & Jonel Subić, 2022. "Measuring the risk-adjusted performance of selected soft agricultural commodities," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 68(3), pages 87-96.
    2. repec:wrk:wrkemf:25 is not listed on IDEAS
    3. Bulat Gafarov & Madina Karamysheva & Andrey Polbin & Anton Skrobotov, 2024. "Wild inference for wild SVARs with application to heteroscedasticity-based IV," Papers 2407.03265, arXiv.org, revised Nov 2024.
    4. Bonnier, Jean-Baptiste, 2021. "Speculation and informational efficiency in commodity futures markets," Journal of International Money and Finance, Elsevier, vol. 117(C).
    5. MacLachlan, Matthew J. & Boussios, David & Hagerman, Amy D., 2021. "Market Responses to Export Restrictions from Highly Pathogenic Avian Influenza Outbreaks," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 47(1), January.
    6. Luciana Juvenal, 2020. "Terms-of-Trade Shocks are Not all Alike," IMF Working Papers 2020/280, International Monetary Fund.
    7. Nicolas Legrand, 2019. "The Empirical Merit Of Structural Explanations Of Commodity Price Volatility: Review And Perspectives," Journal of Economic Surveys, Wiley Blackwell, vol. 33(2), pages 639-664, April.
    8. Zhang, Yongmin & Ding, Shusheng & Scheffel, Eric M., 2019. "A key determinant of commodity price Co-movement: The role of daily market liquidity," Economic Modelling, Elsevier, vol. 81(C), pages 170-180.
    9. Algirdas Justinas Staugaitis & Bernardas Vaznonis, 2022. "Financial Speculation Impact on Agricultural and Other Commodity Return Volatility: Implications for Sustainable Development and Food Security," Agriculture, MDPI, vol. 12(11), pages 1-27, November.
    10. Haase, Marco & Seiler Zimmermann, Yvonne & Zimmermann, Heinz, 2016. "The impact of speculation on commodity futures markets – A review of the findings of 100 empirical studies," Journal of Commodity Markets, Elsevier, vol. 3(1), pages 1-15.
    11. Valenti, Daniele & Bertoni, Danilo & Cavicchioli, Davide & Olper, Alessandro, 2023. "Understanding the role of supply and demand factors in the global wheat market: a Structural Vector Autoregressive approach," FEEM Working Papers 338780, Fondazione Eni Enrico Mattei (FEEM).
    12. MacLachlan, Matthew J. & Boussios, David, 2018. "Identifying the price determinants of animal products in the presence of structural breaks," 2018 Annual Meeting, August 5-7, Washington, D.C. 273974, Agricultural and Applied Economics Association.
    13. Dalia Ghanem & Aaron Smith, 2022. "Causality in structural vector autoregressions: Science or sorcery?," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(3), pages 881-904, May.
    14. Sun, Zesheng & Wang, Yaoqing & Zhou, Xu & Yang, Lunan, 2019. "The roundabout from interest rates to commodity prices in China: The role of money flow," Resources Policy, Elsevier, vol. 61(C), pages 627-642.
    15. Covindassamy, Genevre & Robe, Michel A. & Wallen, Jonathan, 2016. "Sugar With Your Coffee?: Financials, Fundamentals, and Soft Price Uncertainty," IDB Publications (Working Papers) 8588, Inter-American Development Bank.
    16. Adjemian, Michael K. & Janzen, Joseph & Carter, Colin A. & Smith, Aaron, 2014. "Deconstructing Wheat Price Spikes: A Model of Supply and Demand, Financial Speculation, and Commodity Price Comovement," Economic Research Report 167369, United States Department of Agriculture, Economic Research Service.
    17. Wu, Hao & Zhu, Huiming & Huang, Fei & Mao, Weifang, 2023. "How does economic policy uncertainty drive time–frequency connectedness across commodity and financial markets?," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).
    18. Apperson, George P., 2014. "Agricultural Commodity Futures Market Volatility: A Case for Punctuated Equilibrium," 2015 Annual Meeting, January 31-February 3, 2015, Atlanta, Georgia 196760, Southern Agricultural Economics Association.
    19. Fishe, Raymond P.H. & Smith, Aaron, 2019. "Do speculators drive commodity prices away from supply and demand fundamentals?," Journal of Commodity Markets, Elsevier, vol. 15(C), pages 1-1.
    20. Jean-Baptiste Bonnier, 2021. "Speculation and informational efficiency in commodity futures markets," Post-Print hal-04299220, HAL.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:ajagec:v:100:y:2018:i:1:p:264-285.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/aaeaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.